Believe it or not, cash will not remain king, not even too long from now.
Covid-19 pandemic opened our eyes to this, not only by escalating the paradigm shift but also bringing to the mainstream the acceptance of physical cash alternatives like cryptocurrency, central bank digital currencies (CBDCs).
Eswar Prasad, the author of "The Future of Money: How the Digital Revolution is Transforming Currencies and Finance," posited that “for many consumers and businesses that made the switch to digital payments, there is probably no going back, even if the pandemic-related concerns about the tactile nature of cash were to recede.”
The pandemic has set the ball rolling, and it will continue to roll until it rolls over the fiat currency.
Businesses are not only rapidly integrating digital payment gateways on their business websites and online stores, they are as well integrating the digital currencies payment options, allowing customers pay for goods and services with digital assets.
Though there are infinite ways the future of money can evolve, experts predict that the combination of cryptocurrency, stablecoins, central bank digital currencies (CBDCs) and other digital payment systems will lead to the "demise of physical cash."
Due to decentralized nature of cryptocurrency, many countries are beginning to introduce their own digital currencies known as central bank digital currencies (CBDCs).
What to know about each of these digital currencies:
Central Bank Digital Currencies (CBDCs)
A CBDC is a digital form of central bank-issued money. Those in trials are backed by a central bank and represent money that's a direct liability of the central bank.
Several central banks are experimenting with CBDCs, though most are in very early stages.
China, Japan, Sweden and Nigeria have commenced CBDC trials, and the Bank of England and the European Central Bank are preparing their own trials. The Bahamas rolled out the world's first CBDC, the sand dollar.
The U.S. Federal Reserve remains hesitant to begin the potential development of a CBDC, but chair Jerome Powell has said the central bank is thoroughly researching the possibility.
The technology behind each CBDC depends on the preferences of the country and its central bank. In some cases, CBDCs are run on distributed ledger technology, which is a type of database that can store multiple copies of financial records, like transaction history, across multiple entities. These entities can be managed overall by a central bank.
This differs from the blockchain behind popular decentralized cryptocurrencies like bitcoin, since a CBDC would be controlled by one entity, a central bank. That's also why a CBDC wouldn't be considered a cryptocurrency.
Stablecoins
Stablecoins are cryptocurrencies that are meant to be pegged to a reserve asset, such as gold or the U.S. dollar, but are not issued by a central bank. The business case for stablecoins is that they provide low-cost and easily accessible digital payments within and across national borders.
A wider use of stablecoins as a medium of exchange could benefit the poor and the unbanked, as well as small businesses, such as street vendors, in making transactions.
Cryptocurrencies
Cryptocurrencies, like bitcoin, are decentralized. And unlike stablecoins, these other cryptocurrencies are not backed by any reserve asset. Most times, their value is derived from supply and demand.
Bitcoin, for example, launched in 2009 with the intent to work as a peer-to-peer financial system. Its blockchain was carefully created and has a well-thought-out ecosystem. Bitcoin also has a limited supply, which allows for built-in scarcity by design. Because of that, it's seen as a store of value by its holders.
One reason cryptocurrencies could make payments more efficient is because they can allow for quick and transparent cross-border financial transactions, Prasad says. That could be helpful in a number of situations, especially for those who need to send money to family overseas.
Cryptocurrencies will help make payment systems more efficient.
However, most cryptocurrencies are very volatile, which could hinder their long-term success as mediums of exchange, Prasad says. Because of this instability, cryptocurrencies will likely not be used for daily transactions.
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Demerits of Cashless
It is quite certain that the future of money will be cashless, but then, a whole dependence on digital payments wouldn’t guarantee perfect system.
1. Despite that digital payments are ways of democratizing finance, they could further the income and wealth inequality gab. The rich may be more empowered to take the advantages of new investment opportunities and profiting from them, thereby becoming much richer. The poor population may be impoverished the more. Although fintech is driving financial inclusion of the unbanked and economically marginalised strata of the population, it could harm them the more as most of them lack or has limited digital access and financial literacy. Prasad, a senior professor of trade policy at Cornell University, a senior fellow at the Brookings Institution and the former head of the International Monetary Fund's China division, told CNBC, "as the economically marginalized have limited digital access and lack financial literacy, some of the changes could harm as much as they could help those segments of the population."
2. Smaller economies or countries with weak currencies could see their central banks and currencies being swept away or becoming less relevant. If digital payments becomes more prominent, Nigeria’s naira, for instance, will become weaker. This could concentrate even more economic and financial power in the hands of the large economies. This is one of the reasons Central Bank of Nigeria banned cryptocurrency transactions in the country, introduced its own digital currency, eNaria. Recently the Central Bank of Nigeria announced that it's upgrading eNaira mobile App to include features for online payments such as telecommunications airtime and internet data, paid TV subscription, airline ticks, etc to ensure acceptability and sustainability of eNaira.
3. Fraud: digital payments exposes users to internet fraud, digital wallets will become target of hackers.
4. Lack of privacy: By using digital payments platforms, one has surrendered one's right of privacy. Third-party and unauthorized persons may have access to one's personal data, although the payments gateway API services providers and the recipient of the payments often assures of users personal data security, but such assurance can’t be taken to the bank, as they may not likely be held response for any breach.
Physical cash still has a number of advantages, including confidentiality in financial transactions and privacy.
Conclusion
The button line is that the end of cash is on the horizon and the time has come for an extensive public debate on what replaces it. The big issue is, it is not just going to affect only money, rather also the economy, finance and society.
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